Sunoco 2005 Annual Report Download - page 36

obligations. The present values of Sunoco’s future pension and other postretirement obliga-
tions were determined using discount rates of 5.60 and 5.50 percent, respectively, at De-
cember 31, 2005 and 5.75 and 5.50 percent, respectively, at December 31, 2004. Sunoco’s
expense under these plans is determined using the discount rate as of the beginning of the
year, which for pension plans was 5.75 percent for 2005, 6.00 percent for 2004, 6.75 per-
cent for 2003, and is 5.60 percent for 2006, and for postretirement plans was 5.50 percent
for 2005, 6.00 percent for 2004, 6.75 percent for 2003, and is 5.50 percent for 2006.
The long-term expected rate of return on plan assets was assumed to be 8.50 percent for
2005 and 8.75 percent for 2004 and 2003, while the rate of compensation increase was as-
sumed to be 4.00 percent for each of the last three years. A long-term expected rate of re-
turn of 8.25 percent on plan assets and a rate of compensation increase of 4.00 percent will
be used to determine Sunoco’s pension expense for 2006. The expected rate of return on
plan assets is estimated utilizing a variety of factors including the historical investment re-
turn achieved over a long-term period, the targeted allocation of plan assets and expect-
ations concerning future returns in the marketplace for both equity and debt securities. In
determining pension expense, the Company applies the expected rate of return to the
market-related value of plan assets at the beginning of the year, which is determined using
a quarterly average of plan assets from the preceding year. The expected rate of return on
plan assets is designed to be a long-term assumption. It generally will differ from the actual
annual return which is subject to considerable year-to-year variability. As permitted by ex-
isting accounting rules, the Company does not recognize currently in pension expense the
difference between the expected and actual return on assets. Rather, the difference is de-
ferred along with other actuarial gains or losses resulting from changes in actuarial assump-
tions used in accounting for the plans (primarily the discount rate) and differences
between actuarial assumptions and actual experience. If such unrecognized gains and losses
on a cumulative basis exceed 10 percent of the projected benefit obligation, the excess is
amortized into income as a component of pension or postretirement benefits expense over
the average remaining service period of plan participants still employed with the Com-
pany, which currently is approximately 11 years. At December 31, 2005, the unrecognized
net loss for defined benefit and postretirement benefit plans was $493 and $68 million, re-
spectively. For 2005, the pension plan assets generated a return of 8.7 percent, compared to
12.2 percent in 2004 and 24.1 percent in 2003. For the 15-year period ended December 31,
2005, the compounded annual investment return on Sunoco’s pension plan assets was 10.2
percent.
The asset allocation for Sunoco’s pension plans at December 31, 2005 and 2004 and the
target allocation of plan assets for 2006, by asset category, are as follows:
December 31
(In Percentages) 2006 Target* 2005 2004
Asset category:
Equity securities 60% 65% 64%
Debt securities 35 32 32
Other 534
Total 100% 100% 100%
*These target allocation percentages have been in effect since 1999.
The rate of compensation increase assumption has been indicative of actual increases dur-
ing the 2003-2005 period.
The initial health care cost trend assumptions used to compute the accumulated postretire-
ment benefit obligation were increases of 11.0 percent, 10.3 percent and 11.4 percent at
December 31, 2005, 2004 and 2003, respectively. These trend rates were assumed to de-
cline gradually to 5.5 percent in 2012 and to remain at that level thereafter.
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